Saturday, 23 January 2016

Power of Compounding: Investment Magic



Einstein said once “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” 



Let’s take example of Mr. Early X and Mr. Late Y.

Mr Early X thought to start planning for his retirement on age of 25 and started the 5000/ monthly SIP in Mutual Fund for next 15 years. While Mr Late Y thing 25 is not a age to thing about retirement and its time to enjoy the life but later stage Mr Late Y thing retirement planning is also very important and Mr Late Y started 1000/monthly SIP for next 15 years.
So now here is the comparison between both of our Mr X and Mr Y.



Mr Early X
Mr Late Y
Amount invested
5000*15*12 =9  lakhs
10000*15*12= 18lakhs
Investment Horizon
60-25= 35 years
60-35=25 years
At age of 60 Retirement Corpus
3.88* Cr
2.09* Cr
(Note* : Assuming the average of 14% return from MF Compounding basis. )
 
At age of 60 Mr Early X has 1.85 times more amount than Mr Late Y with half of investment then Mr Late Y. It’s not how much you invest , it how long you invest make a difference.

Let’s take well known example of Wipro's  10000 to 528Cr Journey. 
Let’s just assume that you bought 100 shares of Wipro each at a face value of Rs.100 in the year 1980. Total investment: Rs.10,000. You don’t touch it at all, no profit booking or buying more shares. Wipro has done various bonuses and stock splits in its history of 1980-2014. Here is the list of all such corporate actions:
Wipro Investment growth
Year
Action
Number of Shares
1980
Initial Investment
100
1981
1:1 Bonus
200
1985
1:1 Bonus
400
1986
Stock split to FV Rs.10
4,000
1987
1:1 Bonus
8,000
1989
1:1 Bonus
16,000
1992
1:1 Bonus
32,000
1995
1:1 Bonus
64,000
1997
2:1 Bonus
1,92,000
1999
Stock split to FV Rs.2
9,60,000
2004
2:1 Bonus
28,80,000
2005
1:1 Bonus
57,60,000
2010
2:3 Bonus
96,00,000

After the year 2010, there were no more bonuses or stock splits. But with just that initial investment of Rs.10,000 (100 shares) you now would end up with 96,00,000 shares of the company because of all the stock splits and bonus shares. Current stock price of wipro is about Rs.550 per share, as of 22 Jan, 2016.
INR 550 × 96,00,000 = Rs.528 Cr. That is a CAGR (Compound Annual Growth Rate) of 47.39%. Does any of your bank FD give you 47% annual interest rate.

And we are not even considering dividend pay-out here. Recent dividend declared was 5 per share which make 4.8 Cr as dividend and we have many dividends like this. 
Just Amazing compounding is !!!

Mr Warren Buffet said it correct “Someone is sitting in the shade today because someone planted a tree a long time ago.



 Be Smart. Invest Smartly